About Innovate Finance 

Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Innovate Finance's mission is to accelerate the UK's leading role in the financial services sector by directly supporting the next generation of technology-led innovators. 

The UK FinTech sector encompasses businesses from seed-stage start-ups to global financial institutions, illustrating the change that is occurring across the financial services industry. Since its inception following the Global Financial Crisis of 2008, FinTech has been synonymous with delivering transparency, innovation, and inclusivity to financial services. As well as creating new businesses and new jobs, it has fundamentally changed the way in which consumers and businesses are able to access finance. 

This response sets out the views of Innovate Finance, based on consultation with members across the UK FinTech ecosystem. Our policy view is focused on creating an environment that best supports FinTech StartUps, ScaleUps and high growth firms and it is these groups of members who have predominantly shaped our response and we have reflected views and feedback received from these FinTech firms. We have particularly consulted firms who provide sustainability products and solutions and RegTech firms who provide compliance and regulatory reporting solutions.

Introduction and key points 

Innovate Finance welcomes the opportunity to respond to CP22/20. We strongly support the development and introduction of a regime for sustainability disclosure  and investment labels. We are concerned that the effectiveness and wider benefits of this approach will be significantly reduced by the proposed decision to rule out a requirement for eXtensible Business Reporting Language (XBRL) tagging for machine readability.  

Our members would encourage the FCA to reconsider this decision.  Requiring tagging XBRL framework would promote interoperability between different software applications and will allow the FCA to achieve greater automation and scale. In addition, requiring machine readability will support greater product development, consumer product comparisons, more effective auditing and cheaper and better RegTech solutions to compliance. Given the Securities and Exchange Commission (SEC) in the USA has proposed to require XBRL tagging, failure by the UK to do so risks UK competitiveness in developing more advanced technology based systems and solutions.

CP22/20 gives no evidence or good reason why machine readability has been ruled out other than a reference to “stakeholder feedback to our discussion paper that while considered useful, it may be premature to do so”. No further evidence is given and the suggestion that it ‘may be premature’ is in itself equivocal.

XBRL promotes interoperability between different software applications.  This enables disclosure to be written in a proprietary format that everyone can get their software to understand.

This promotes greater efficiency, effectiveness, and accessibility, enabling:

• Greater compliance, with technology enabled compliance solutions that can be more efficient and effective;
• It reduces rework, human intervention, and high potential for error;
• Ability to audit, assess and compare product docuslures; and
• Greater accessibility and ease of use by consumers, including product comparability.

If the FCA wants to achieve greater automation and scale, this will be a massively enabling feature.

Machine readability is an important component of enabling RegTech solutions, which ostensibly the FCA supports. The UK has a major RegTech sector which has potential to scale significantly but to do so it needs a regulatory environment that actively supports RegTech products.

We also note that CP20/22 states that XBRL tagging will not be required “at this stage”. No timetable or roadmap is provided. Whilst we believe that this feature should be mandated as part of initial implementation, at the very least the FCA should set a clear timetable and roadmap for the introduction of XBRL tagging to enable machine readability. The disclosure rules and the implementation plans by regulated firms need to enable machine readability to be designed in at the outset. Unless this is done, additional cost and greater change will be required down the track. 

The UK has a strong basis for XBRL tagging that can be built on. The software industry has supported XBRL for over a decade and the accountancy providers all support XBRL. However, the adoption across financial services has been haphazard. While XBRL is mandatory for SMEs filing  accounts and is automatically created by SME accounts filing software, FTSE100 companies who would be expected to lead by way of auditing standards do not use XBRL. This is because their finance departments often produce accounts in Word Documents, meaning that they are not linked to the underlying finance system and transcription errors occur. Mandating XBRL would remove the transcription errors and improve the accuracy of the accounts and ensure that closing balances are correctly entered into the systems and updated at the end of audit.

This is also an issue of international competitiveness. The UK was once regarded as a leader in this area, however the US and most European countries have now caught up and passed the UK on XBRL mandates. As other countries move faster towards machine readability, their disclosure rules will promote greater innovation and provide for greater accuracy and auditability, in turn building stronger trust and reliability compared to the UK. XBRL mandates are therefore essential for the UK to maintain its ability to foster innovation domestically and compete internationally.  If disclosure requirements are made voluntary, organisations will not incentivised to comply and the UK will continue to fall behind.

Q2: Do you agree with the proposed implementation timeline? If not, what alternative timeline would you prefer, and why?

The proposed implementation timeline should include a clear timetable for introduction of XBRL tagging for machine readability in product disclosure.  

As stated above, CP22/20 states that XBRL tagging will not be required “at this stage”. No timetable or roadmap is provided. Whilst we believe that this feature should be mandated as part of initial implementation, at the very least FCA should set a clear timetable and roadmap for its introduction. The disclosure rules and the implementation plans by regulated firms need to enable machine readability to be designed in at the outset. Unless this is done, additional cost and greater change will be required down the track. 

Q12: Do you agree with our proposal to build from our TCFD‑aligned disclosure rules in the first instance, evolving the disclosure requirements over time in line with the development of future ISSB standards?

As we also argued in our response to DP21/4 ‘Sustainability Disclosure Requirements and Investment Labels’, the FCA should make it mandatory to provide disclosures in a machine-readable format. Making it mandatory to provide disclosures in a machine-readable format would allow for ease of monitoring and supervision of the new regime, more efficient data analysis, and create new opportunities for regulatory technology solutions to be developed by the private sector. Additionally, if market participants’ data sets were made available (in a similar vein to the synthetic data sets provided to participants in the regulator’s Digital Sandbox), then this could unlock further innovative solutions. There are already fantastic use cases that leverage available data; one of our members, for example, has been working with partners to model and categorise transactional data (e.g. carbon numbers associated with ISIN numbers), which has revealed valuable insights about the broader value chain. Based on a survey conducted by one of our members, two thirds of FTSE 100 companies under-report their emissions by a factor of 10x to 100x of their actual total emissions.  This member shared that their analysis was made significantly more time consuming because FTSE100 companies are not required to provide accounts in XBRL format.

This would also enable the adoption of more technology-led ways in which to monitor compliance with the new sustainability disclosure and investment labels requirements. TechSprints on model driven, machine readable and executable regulatory reporting have proven that the regulator and regulated firms can build a workable model where real-time updates can be shared by firms. Technology-driven supervision could offer a real-time, or near real-time, way in which to determine the efficacy of the new regime. The FCA Digital Sandbox sustainability cohort in 2021/22 included exploration of the use of digital ledger technology in the context of assurance for market participants’ ESG data. We would also encourage the regulator to explore the extent to which embedded supervision [a framework that allows compliance with regulatory requirements to be automatically monitored by reading the ledger, reducing the need for firms to actively collect, verify and deliver data] can be deployed.

1  Case studies of FinTech green finance solutions can be found here: Innovate Finance response to HM Government update to Green Finance Strategy call for evidence.

2  Annex 1, paragraph 18 of CP22/20.